Bullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have a cash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM will depreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a required rate of return for all of its gold mines of 12%. Earnings before taxes (in $1,000s): 0 1 2 3 4 5 6 7 8 9 37,857.14 60,714.29 96,428.57 157,857.1 203,571.4 132,142.9 117,857.1 85,000.00 Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV, IRR and Payback Period for the cash flows and indicate whether BGM should pursue the mining project or not. Operating cash flows for Time 1-8 should include: Earnings before taxes Taxes (30%) Net Income Depreciation Free Cash flows
Bullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have a cash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM will depreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a required rate of return for all of its gold mines of 12%. Earnings before taxes (in $1,000s): 0 1 2 3 4 5 6 7 8 9 37,857.14 60,714.29 96,428.57 157,857.1 203,571.4 132,142.9 117,857.1 85,000.00 Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV, IRR and Payback Period for the cash flows and indicate whether BGM should pursue the mining project or not. Operating cash flows for Time 1-8 should include: Earnings before taxes Taxes (30%) Net Income Depreciation Free Cash flows
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 12P
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- Bullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has
forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have acash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM willdepreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a requiredrate of return for all of its gold mines of 12%.
Earnings before taxes (in $1,000s):
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
|
37,857.14 |
60,714.29 |
96,428.57 |
157,857.1 |
203,571.4 |
132,142.9 |
117,857.1 |
85,000.00 |
|
Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV,
Operating cash flows for Time 1-8 should include:
Earnings before taxes
Taxes (30%)
Net Income
Depreciation
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